Envestnet | PMC provides independent advisors, broker-dealers, and institutional investors with comprehensive manager research, portfolio consulting, and portfolio management to help improve client outcomes. Every month our Global Macro Team offers insights into the themes currently shaping the markets to help you quickly take note of recent trends that your clients may be inquiring about.
Keeping an eye on real estate
The housing market continues to surge. The increase in prices has not only confounded those looking to buy but has also caught the attention of the Federal Reserve. Growth in home prices reached a pace that hasn’t been seen in over three decades. Led by Phoenix, San Diego, and Seattle, home prices jumped by about 15 percent year-over-year in April and continued through May, as the median home price in May was up 23.6 percent year-over-year.1,2 The accelerated growth is caused by a number of factors including, low mortgage rates, a dearth of housing inventory, and a pandemic-induced flight to the suburbs.2 The Fed says that the economy would be hurt by a boom-and-bust cycle in the housing market.1 Preliminary discussions are under way to begin rolling back its asset purchases amidst concerns of a nascent bubble developing.1
Read more about our thoughts on the current state of the housing market.
Zombie companies
Social media hyped stocks are the latest advent of the post COVID-19 investment world, and over the last few weeks the mania has spread. When looking at the Russell 3000 index, a wide ranged benchmark of domestic stocks, more than 720 companies don’t generate enough earnings to make their interest payments, often referred to as zombie companies. Despite their financial weakness, these zombie companies have significantly outperformed the entire Russell 3000 index over the course of 2021.3 It seems as though the social media investment cohort picks stocks not based on traditional fundamental metrics, but rather based on trade alongside other like-minded individuals, purchasing stocks of financially distressed companies. All this begs the question of whether this a valid investment thesis, or a pump and dump scheme that will soon play itself out. Regardless, traditional asset managers are beginning to take note and have adjusted their investment process to account for the existence of meme stocks.
Conversion from mutual funds into ETFS to exceed $1 trillion in the coming decade
ETFs offer many advantages over their mutual fund counterparts, including tax efficiency, lower fees, intra-day trading capability, and holdings transparency. While the mutual fund-to-ETF conversion process can be complicated due to potential issues such as track-record portability and other legal and operational issues, technology improvements coupled with the inherent advantages of the ETF structure will make the conversion easier and more desirable. The rising popularity of active ETFs over passive ones, partially inspired by the success of Ms. Catherine Wood’s ARK ETFs, will only accelerate the mutual fund-to-ETF conversion.4,5
Corporate credit spreads near record tights as economy recovers
Despite widespread fears of inflation as the U.S. economy recovers from the trauma of COVID-19, investors have continued to pour money into the fixed income markets during the first half of 2021. Support from the Federal Reserve, aging demographics, and rebalancing after a tough first quarter have no doubt played a large role in driving the $374 billion into taxable fixed income mutual funds and ETFs that the Investment Company Institute (ICI) reported through mid-June. These flows have combined with risk-on sentiment to produce a sharp tightening in corporate spreads, which have reached their richest levels in over a decade.
The difference couldn’t be starker between the present environment and March 2020, when the option-adjusted spread (OAS) on investment grade corporates reached 373 basis points (bps) and high yield spreads touched 1100 bps. By the end of June 2021, the OAS on U.S. investment grade corporates had fallen to 80 bps reflecting 16 bps of tightening year-to-date.6 Similarly, the OAS on high yield corporate debt has tightened 92 bps in 2021 through June, reaching 268 bps – the tightest level for the index since 2007.6 With issuers, particularly the riskiest ones, wasting no time securing financing at such rich levels, fixed income managers have their work cut out for them.
Sources:
- Delphine Strauss and Colby Smith, “Runaway house prices: the ‘winners and losers’ from the pandemic,” Financial Times, June 25, 2021, https://www.ft.com/content/05a1ebb3-15d7-4847-a71f-2e559edb459f
- James Politi and Colby Smith, “U.S. cannot afford housing market ‘boom and bust’, warns Fed official,” Financial Times, June 27, 2021, https://www.ft.com/content/ff83ed04-3bb5-444a-9af0-1b466201ef67
- Katherine Doherty and Tom Contiliano, “Zombies Defy Bankruptcy Logic Amid Meme-Driven Rally,” Bloomberg, June 11, 2021, https://www.bloomberg.com/news/articles/2021-06-11/zombie-stocks-defy-bankruptcy-logic-as-meme-traders-bid-them-up
- Jenny Surane and Katie Greifeld, “A $1 Trillion Mutual Fund-to-ETF Bonanza May Be Getting Started,” Bloomberg News, June 16, 2021, https://www.bloomberg.com/news/articles/2021-06-16/a-1-trillion-mutual-fund-to-etf-bonanza-may-be-getting-started
- Claire Ballentine, “Passive-Investing World Turned Upside Down as Active Funds Boom,” Bloomberg News, June 19, 2021, https://www.bnnbloomberg.ca/passive-investing-world-turned-upside-down-as-active-funds-boom-1.1618987
- Joe Rennison and Eric Platt, “Bond spreads collapse as investors rush into corporate debt,” Financial Times, June 18, 2021, https://www.ft.com/content/ed39b06a-a9e1-4e6c-9fa1-f386d06d6410
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